LNT Runs Out of Time

Unable to win Noteholders' Support, LNT Girds for the End

Brent Felgner, October 13, 2008

Barring what even insiders acknowledge would amount to a last-minute-miracle save, the nation's No. 2 home fashions specialty retailer will simply disappear over the next several weeks.

The liquidation of Linens 'n Things seemed imminent and quite likely unavoidable late last week as a consortium of take-down firms joined to become the stalking horse liquidator for the chain's remaining 371 stores. Competitive bids, if any, are due by 4 p.m. Monday, Oct. 13, and that's also regarded as the outside limit for a going-concern bidder to emerge. The auction is slated for Tuesday; the court will consider ratifying the outcome the next day.

If no savior emerges, the going-out-of-business sales will commence Oct. 16.

"It's a sad demise," commented Eugene Kalkin, who founded the chain more than 30 years ago. "Linens 'n Things was the progenitor of off-price retailing in the home textiles industry."

Kalkin ultimately sold LNT to Melville Corp., which took it public in 1996. In 2006, it was sold again and taken private in a heavily leveraged $1.3 billion buyout by NRDC Partners, Silver Point Capital and affiliates of Apollo Management, which held the controlling interest.

Discussions to avert a total liquidation were continuing into last weekend apparently with at least two entities that still could emerge as going-concern buyers for the chain, according to LNT. It was unclear just how serious or far along those discussions were.

"They're still talking with a number of different people [in the hopes of] keeping some or all of the stores open," Rich Tauberman, an outside spokesman for LNT, offered. "What will happen is anybody's guess, but as Yogi said, it's not over 'til it's over.'"

He characterized the effort as offering a "decent chance" of success but tacitly acknowledged the long odds against such an outcome. Tauberman did not identify who was participating in those talks.

If the liquidation moves forward, the GOB sales will present an "everything must go" scenario down to the bare walls. The liquidation consortium consists of some of the largest retail undertakers in North America: Gordon Brothers Retail Partners, Hilco Merchant Resources, SB Capital Group, Tiger Capital Group, Great American Group and Hudson Capital Partners. All were suitors in earlier rounds of store closings.

A motion to approve the bidding and sale procedures, and agency agreement was slated for consideration in a Delaware federal bankruptcy court last Friday against a handful of objections. They came mostly from landlords worried about garish signing and the disruptions the GOB sales might have on their other tenants.

In any event, the court documents anticipate that the entire business will be done by Nov. 28; the hollowed stores are to be left "broom clean."

Fate sealed

In the comings weeks and months, there will likely be continued broad speculation about when LNT's fate was sealed. Arguments could easily be made that its troubles extend back even before its 2006 LBO, when it assumed $650 million in term debt, even before the first box of inventory was re-merchandised in an effort at turnaround.

What seems clear is that the clock began ticking for LNT prior to its bankruptcy filing when noteholders began hardening their positions on Linens' $16 million interest default in April. By the time LNT filed for Chapter 11 protection on May 2, a slow spiral was already underway: Many vendors stopped shipments completely, although most resumed them post-bankruptcy with sharply limited terms.

Many vendors were outraged by what they considered then-executive chairman and ceo Robert DiNicola's lack of communication as the company was going down. At the time of the filing, it became clear that DiNicola had to step out of the limelight if LNT was to win back vendor support. He was moved out of the ceo's role to the post of executive chairman, while turnaround specialist Michael Gries joined the firm as interim ceo and chief restructuring officer. One of Gries' first orders of business was to recapture management's credibility.

The company began emptying its warehouses, in some cases pushing visibly shop-worn merchandise to sales floors to fill the shelves.

The retailer's trade vendor program, aimed at propping up the promise of at least half payment for post-bankruptcy shipments, was largely ignored until LNT upped the deal to a one-to-one payment. Even then, the program received lukewarm support.

No consensus

In the meantime, court and company documents indicate that LNT was unsuccessfully struggling to manage the company financially as the larger economy and housing markets tanked. Along the way, LNT missed benchmarks in its debtor-in-possession financing and renegotiated waivers, with tightening conditions. The secured noteholders were apparently becoming even more restless and intransigent in their demands.

As Gries pored over eroding restructuring options, deadlines loomed and noteholders were still withholding their support. The only plan the company seemed to be able to cobble together called for a 100% debt-to-equity swap for the secureds and warrants for the unsecureds. Creditors were underwhelmed by the plan, even as trade creditors continued to root for the retailers' survival.

In the face of a further default in the DIP financing agreement, Gries moved forward, filed the reorganization plan and disclosure statement on Aug. 29, the deadline, without the noteholders' support even as the talks continued, according to court documents.

Eleven days later, on Sept. 9, Linens filed "revised milestones" with a definitive Sale Timeline Agreement. There would be no more bobbing and weaving; the noteholders forced the company to pin down specific dates for specific results.

The document mandated six days later, on Sept. 15, a do-or-die scenario: Come up with a consensual plan of reorganization acceptable to the secureds, sell the company or liquidate.

It called for a stalking horse bidder to be named by Sept. 29, an asset purchase agreement by Oct. 2, auction and sales procedures approved by Oct. 3, the auction by Oct. 14 and, if liquidating, the GOB sales by Oct. 16.

Signing the Sales Timeline Agreement on Sept. 9 for Linens was Francis M. Rowan, the company's cfo, who was with the company nearly 20 years. On Sept. 24, just days before announcing plans to liquidate, LNT announced Rowan had departed the company.

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